NEW YORK, Aug 4 (Reuters) - U.S. Treasury Secretary Scott Bessent's call on the Federal Reserve to expand a facility that lends cash to official foreign accounts could add to the firepower available to help Japan bolster its currency but could unleash other risks, such as tempting the market to test the resolve of Washington and Tokyo.

For starters, it's unclear that the Fed will expand or eliminate the cap on its Foreign and International Monetary Authorities repo facility, which would require agreement by a majority of the U.S. central bank's 12-member Federal Open Market Committee. The facility allows foreign authorities to access up to $60 billion in short-term funds in exchange for U.S. Treasuries as collateral, though it was never designed for this specific use.

The Fed declined to comment about any response to Bessent's request, which came in a social media posting on Sunday when he confirmed that Treasury had undertaken a rare joint intervention to buy yen with Japan's Ministry of Finance on Friday. The yen intervention came after the Japanese currency had sunk to 40-year lows against the dollar in recent weeks, setting off alarm bells in Tokyo and Washington.

"The FIMA Repo Facility is an important backstop," Bessent wrote in his posting on X. "We would encourage it to be upsized in the coming months."

Asked about that request on Tuesday in a CNBC interview, Bessent said that when FIMA was first launched six years ago, "the size of the bond market was much smaller then, so I think it would be reasonable for the Fed to consider upsizing the facility."

"I'm happy that the Japanese government wants to use it and draw on it, and it's a completely secure lending facility. We have swap lines outstanding, so it's really no different than a swap line - that the country posts collateral and we lend them the money to intervene, in this case," Bessent said. "And I think it is a very robust facility, and I think it was set up for occasions just like this."

Upsizing the cap might allow Japan to fund yen purchases without having to sell any of its $1.14 trillion of Treasury holdings, the largest of any foreign power. That approach would be a benefit for a U.S. government facing rising longer-term Treasury yields due to concerns about inflation, the direction of monetary policy and growing debt issuance. The yield on 30-year Treasuries has climbed to the highest levels since 2007, and yields on 10-year notes - influential for things like home mortgage rates - are near the highest level since the start of President Donald Trump's second term in the White House.

Such an expansion "would be a positive signal" for the Treasury market, Daleep Singh, chief global economist at PGIM, said in a note to clients on Monday.

Any tweaks, however, would be "a shock absorber, not a cure for currency trends driven by fundamentals," said Singh, who previously worked at the New York Fed and U.S. Treasury Department.

FACILITY HAS BEEN LITTLE USED SINCE LAUNCH

The FIMA facility was initially established during the onset of the COVID-19 pandemic and is designed to address global dollar funding issues during periods of market stress that could threaten to spill into the U.S. economy. The Fed's website describes it as supporting "the smooth functioning of financial markets more generally."

Launched in 2020 - and made permanent in 2021 - it has seen very limited use outside a short-lived surge of borrowing in March and April 2023 during market upheaval surrounding the sudden collapse of Silicon Valley Bank.

Some market watchers say upsizing FIMA may be more about Bessent trying to signal resolve on the currency intervention, an undertaking that can struggle to show lasting impact, while at the same time being not much of an actual help to Japan, which has plenty of dollars via other channels to deploy.

It is "really more about the posturing that this is the missing piece of the puzzle," said Derek Tang, an economist and co-founder of Monetary Policy Analytics. By trying to play this particular card, "he's coming out and saying, you know, the U.S. basically has infinite firepower to back this trade up. Don't test us."

Evercore ISI analysts, meanwhile, warned of possible market blowback.

"While plans to utilize FIMA could point to greater scope for FX intervention, we see a risk that the focus on a capped Fed repo facility could backfire by inviting markets to test the commitment of the U.S. and Japan to strengthen the yen if doing so requires large sales of U.S. Treasuries," the firm said in a note.

Lastly, lifting the FIMA caps might also complicate another of Bessent's aims: a smaller Fed balance sheet. Big FIMA usage would add to Fed holdings - at least on a temporary basis - at a time when the central bank under new Fed Chairman Kevin Warsh is exploring ways to reduce its footprint in markets.